401(k) Fees Are Robbing You Blind

Everybody knows you should be investing in your company's 401(k)
plan, but here's something that almost nobody knows: Investing in
a 401(k) could cost your three years' salary.

That's the surprising upshot of a new study by the
financial folks at NerdWallet, whose InvestingNerd
division just
ran a study concluding that "9 out of 10 Americans
(92.6%) dramatically underestimated the
total 401(k) fees the average household
will pay over the course of a lifetime."

According to NerdWallet, when posed the question "How much
will the average American household with 2 working adults pay in
401(k) fees over the course of their lifetime?"

38.1 percent of respondents thought a 401(k) might cost them
less than $10,000.

32.8 percent guessed somewhere between $10,000 and $50,000.

13.8 percent thought $50,000 to $100,000.

7.9 percent said $100,000 to $150,000.

And 4.1 percent tried "The Price Is Right" gambit, shooting
the moon and guessing in excess of $200,000.

The correct answer is $150,000 to $200,000 -- but only 3.3
percent of respondents got it right.

The High Price of a Lifetime of Saving

NerdWallet underlies its findings with
a report
by public policy organization Demos from last
summer, which added the further frightening fact that among folks
investing in 401(k) plans, a full two-thirds had no idea they
were paying anything at all for
their 401(k) (which actually makes all of the folks who guessed
wrong in NerdWallet's poll look pretty smart by
comparison).

U.S. Census Bureau figures put the average household income
in America today at just a hair over $50,000. Demos' report,
however, shows that over the course of an investing lifetime, an
average two-income family in the U.S. could spend as much as
$155,000 paying the fees that managers charge for running the
funds that make up your 401(k).

How does this happen? It's quite simple, really. When you
invest in your company's 401(k), unless you keep the money in
cash (and with cash yielding less than 1 percent today, good luck
with that), what you're usually doing is buying various mutual
funds that are held within your 401(k) account.

The 401(k) industry says expense ratios across all funds
averaged about 0.78 percent in 2011. And according to Demos'
calculations, deducting these fees year after year, every year,
over the course of an investing lifetime, drags down the returns
from investing in 401(k)s by the aforementioned
$155,000.

That's a bit more than three years' salary for most
Americans.

What It Means for You

This hardly seems fair. For years we've heard about
the imminent demise of Social
Security, with workers today paying money into the
system -- and that money being immediately doled out to retirees
today, rather than tucked away to pay back today's
payers.

We all know that corporate pension plans are a thing of the
past, as companies all across the country try by hook and by
crook to do away with them. Witness Boeing's
(BA) contentious
negotiations with its labor unions last year. (By
the way, Boeing won, and its workers are slowly shifting to
401(k)s.)

Yet now we learn from Demos and NerdWallet that doing what
you're supposed to be doing -- investing steadily in your future
by making regular deposits in your 401(k) -- could cost you three
years' salary. Unfair!

So how do you cut this cost, and keep more of your money
for yourself? Actually, that's not too hard.

Most funds are "actively managed" by managers who pick and
choose stocks for their funds, and the fees for these services
add up to about 0.93 percent on average -- again, year after
year, every year. Putting your 401(k) money in passive "index"
funds, which simply and automatically track the returns of major
stock market indexes, can cost as little as 0.14 percent per fund
-- less than one-fifth the average cost.

Sound like a better deal to you? In many cases, it can
be. Click
here to find out more.